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Rights of nomination

By Natasha Garg

A nominee in common parlance is understood as a beneficiary who has been so nominated to receive the benefit of a moveable asset (money) on the death of the person who is the owner of such asset and who has named the nominee in the relevant document.

Nomination facility can be availed by an individual for assets/facilities like insurance policy, bank account, locker, society, demat account, shares, NSC, post office, mutual fund, PF, PPF & gratuity. Nomination is usually done solely for the purpose of simplifying the procedure for settlement of claims of the deceased and is an ideal tool to reduce hardships during the settlement of claims in the event of death of the person who has done the nomination.

The legal position of a nominee has always been accepted to be that of an ‘agent’ or ‘trustee’ and nomination is not considered to be a method of testamentary succession as an alternate to a will.  High Courts in India  have held in different cases that a nominee is only an  agent to receive the amount when due and it remains the property of the assured during his lifetime and on  death, forms part of his estate subject to the applicable law of succession.

March of law

The Supreme Court in the case of Sarbati Devi v. Usha Devi [AIR 1984 SC 346] interpreted the role of a nominee in light of the provisions of the Insurance Act and held that mere nomination  did not  confer on the nominee any beneficial interest in the amount payable under the insurance policy on the death of the assured. The nomination only indicated the hand which was authorized to receive the amount on the payment of which the insurer got a valid discharge of its liability under the policy. During the lifetime of the policy holder, the interest in the policy belonged to the holder alone and the nominee had no right or entitlement under it. On the death of the policy holder, the amount payable under the policy became part of his estate which was governed by the applicable law of succession and may be testamentary or intestate. Therefore, provisions pertaining to nomination under the Insurance Act did not operate as a third kind of succession which could be styled as a statutory testament. A nominee could not be treated as being equivalent to an heir or legatee. The beneficial interest under the policy could, therefore, be claimed by the heirs of the assured in accordance with law of succession governing them. This landmark case reversed the views followed in the earlier cases like Kesari Devi v. Dharma Devi [AIR 1962 All 355], Uma Sehgal v. Dwarka Dass [AIR 1982 Del 36] and S. Fauza Singh v. Kuldip Singh [AIR 1978 Del 276].

The said judgment was followed by a catena of judgments before the Supreme Court. One such case being Shipra Sengupta v. Mridul Sengupta [(2009) 10 SCC 680] where it was held that the position of nomination is no longer res integra and the nominee is entitled to receive the benefit, but the amount so received is to be distributed according to the laws of succession among the legal heirs. In Vishin Khanchandani v. Vidya Khanchandani [AIR 2000 SC 747] a similar interpretation was given to the role of a nominee with respect to Section 6 of the Government Savings Certificate Act, 1956. Therefore, till this time, though the provisions in respect of nomination in each statute like insurance, government savings, co-operative societies etc. may be worded differently, the legal position of a nominee has been accepted to be that of a trustee and is not considered to be any kind of testamentary succession.

Nomination under the Companies Act

The Bombay High Court has differentiated the position of nominee as led by the Supreme Court in the case of Sabarmati Devi (supra). The Bombay High Court has gone on to cite a difference in the position of a nominee under Section 109A of the Companies Act, 1956 which states that “on the death of a shareholder, the nominee would become entitled to all rights in the shares to the exclusion of all other persons”. This means that the nominee will be made the beneficial owner thereof and all the rights incidental to the ownership of the shares would follow upon the death of the shareholder such as right to transfer, right to pledge or even to hold shares. The High Court held that the provisions with respect to nomination in insurance are different from those under Section 109A of the Companies Act as in the former, once the insurance company is paid and is discharged, the amount is paid to the nominee who holds it in trust as there is no other provision thereunder that the nominee would obtain any other right. However, in the latter, the express legislative intent is very clear that the shares specifically vest in the nominee in the event of the death of the shareholder.

Conclusion

Thus, it may be seen that the language used in each statute varies and the consequences therefore also accordingly vary. However, most of these statutes indicate clearly that the purpose of nomination is only to provide a valid discharge to the cooperative society, insurance company or bank or as the case may be and that it does not preclude the legal heirs of the deceased from asserting their claim in the property. The case however is different in the case of shares, where a nomination made during the lifetime of a shareholder, upon his death vests all the rights of the shares in the nominee. In summary, a nominee is considered as a custodian of most of the assets, except shares. On the death of the shareholder, the nominee would become entitled to all the rights in the shares to the exclusion of all other persons. Individuals need to keep this in mind not only at the time of nomination but while writing a will to ensure that the intended person gets the benefit of the asset after the death of the owner/holder.

[ The author is a Senior Associate, Corporate Practice, Lakshmikumaran & Sridharan, New Delhi ]
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